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BOOK REVIEW
Named and shamed
Bailout Nation: How Greed and Easy Money Corrupted Wall Street and Shook the
World Economy by Barry Ritholtz with Aaron Task
Reviewed by Muhammad Cohen
For the past three decades, finance replaced doctor or lawyer as the smart
career choice. The cleverest people gravitated to business schools and then to
Wall Street, some detouring to Silicon Valley during the dot-com boom. So how
did these masters of the universe create the worst global economic misery in 80
years?
It was stupidity and arrogance, pure and simple, fund manager and TheStreet.com
columnist Barry Ritholtz contends in Bailout Nation, the same traits
that led a previous generation of America's best and brightest to the tragedy
of Vietnam (and a group of more recent, less illustrious ideologues to the
debacle in Iraq). At least
Camelot's villains thought they were doing good for the world. The modern
bankers and traders and quants and arbs who acted so irresponsibly, almost
exclusively with other people's money, were simply trying to make themselves
obscenely wealthy.
These "idiots", as Ritholtz often calls them, richly deserve every ounce of
approbation he musters. He repeatedly contends that rather than being bailed
out, they deserve to have been bankrupted, exposed as charlatans, hooted out of
their professions, tarred, feathered, and in some cases jailed.
Helping hand
In his very readable book that will delight general readers as well as finance
buffs, Ritholtz traces the history of US bailouts. He acknowledges that
American capitalism was never purely laissez faire. From manipulating tariffs,
to war, to attacking Barbary pirates, to railroad land grants, Uncle Sam has
assisted commerce.
Moving to modern times, Ritholtz rightly rejects comparisons between the New
Deal and later bailouts. Although the 1930s feature remarkably similar shrieks
of socialist takeover and demagoguery over presidential loyalty and origins
(Franklin Delano Rosenfeld, they said back then), the government response was
quite different. The New Deal focused on sector reform and aid to victims while
the present - and Ritholtz contends, less justifiable - effort provides direct
aid to corporations often guilty of gross mismanagement.
The US conversion to doing the wrong thing to support business began, according
to Ritholtz, with the bailout of Lockheed Aviation in 1971. In that and
subsequent industrial bailouts of Penn Central Railroad and Chrysler Motors,
the government became convinced the country and taxpayers had less to lose from
a bailout than letting the companies fail. Ritholtz explodes that myth by
simply asking how the US auto industry could possibly be in worse shape now if
Chrysler had gone belly up 30 years ago?
Who stole my cape?
The financial bailout era begins with the October 19, 1987, Black Monday crash,
when the Dow Jones Industrial Average plummeted a harrowing 22.6%. That was a
first intervention by the man Ritholtz assigns the greatest slice of blame for
the current debacle, former US Federal Reserve chairman and financial superhero
Alan Greenspan. (Oddly and disappointingly, the book barely mentions the
government's US$180 billion Savings & Loan bailout of the early 1990s.
which at least superficially resembles the present crash.)
Greenspan's predilection to meddle in equity markets combined with his
paradoxical disdain for regulation in the name of free markets created a
climate for excessive risk-taking. When Greenspan cut interest rates to
all-time lows after September 11, 2001, it forced bond investors to search for
new products for returns in an atmosphere where those best and the brightest
had carte blanche to practice financial alchemy with disastrous results.
After Greenspan, Ritholtz assigns the greatest blame to the Fed, twice - for
keeping interest rates too low and failing as a bank regulator; then to rating
agencies Moody's, Standard & Poor's and Fitch for classifying risky bonds
as Triple A; to the Securities and Exchange Commission, for loosening leverage
restrictions on investment banks; to mortgage lenders for offering liar loans;
to borrowers and home buyers for lying; to Congress for its complicity in all;
to the big five Wall Street firms and their greed-addled chief executive
officers for ignoring Ritholtz's "first rule of economics: 'There is no free
lunch'."
Too big to succeed
Ritholtz also placed high in the blame game a figure that epitomized the
pollution of politics with money and the (literal) marriage of government and
business to advantage the privileged while preaching the free-market gospel,
former senator Phil Gramm. Gramm's wife, Wendy, began the job of dismantling
regulation of futures markets and then joined the board of directors at
beneficiary Enron. Gramm (along with Bill Clinton Treasury secretary Robert
Rubin, number 14 on Ritholtz's blame list with protege Larry Summers)
spearheaded repeal of the Glass-Stegall Act that kept banks separate from other
financial institutions. That enabled banks like Citigroup to become, as
Ritholtz puts it, "too big to succeed" and pose systemic risk when they went
bad.
After their government service, Gramm and Rubin took jobs at Swiss bank UBS and
Citigroup respectively, leviathans they helped create and eventually beach,
costing shareholders and the public billions. Gramm remains unrepentant,
"Bailout Nation's most intellectually bankrupt citizen," Ritholtz writes. "Like
Greenspan, Gramm had only one idea; unlike Greenspan, he had no comprehension
it was wrong."
Ritholtz also absolves two of the rightwing fringe's favorite targets, the
Community Reinvestment Act (CRA) of 1977 and government-sponsored mortgage
packagers Fannie Mae and Freddie Mac. The toothless CRA never compelled any
bank to make any loan, let alone a bad loan. Moreover, most lenders making bad
loans weren't covered by CRA. As for Fannie and Freddie, Ritholtz acknowledges
their problems (from good, old-fashioned fraud) that had nothing to do with the
crisis. Politicians and ideologues that seize on CRA, Fannie and Freddy as
villains are showcasing their own ignorance and intellectual bankruptcy.
Putting the A in AIG
When things fell apart in September last year, Ritholtz says, the government
should have nationalized AIG, separating the giant's solvent insurance business
from its loopy financial funhouse. Instead, US taxpayers have doled out $173
billion and counting to repay not widows and orphans holding policies on dear
departed dads, but a coterie of Wall Street tycoons and overseas banks escaping
the consequences of their foolish risks. That's not capitalism but socialism
for the wealthy at taxpayer expense.
For the housing market at the root of the boom and bust, Ritholtz convincingly
demonstrates its disproportionate impact in the post-September US economy. He
proposes converting 30% of any delinquent mortgage into a 10-year balloon loan
with no interest accruing, and lenders carrying the loan as an asset. Ritholtz
estimates that would save about one in five of the homes now threatened with
foreclosure. The rest would need to be foreclosed to let prices adjust to
reality. That's how free markets are supposed to work, rather than the "we
win-you lose" bets Wall Street is still cashing.
Bailout Nation's straightforward, compelling account puts the crisis in
context, explains why the US government responded so stupidly, offers
solutions, and advises how to prevent a repeat. Ritholtz's indictment of the
financial and political establishment isn't terribly unique, but it's
devastatingly accurate.
Bailout Nation: How Greed and Easy Money Corrupted Wall Street and Shook the
World Economy by Barry Ritholtz with Aaron Task. Hoboken, New Jersey,
USA, John Wiley & Sons, May 2009. ISBN: 978-0-470-52038-3. US$24.95; 332
pages.
Former broadcast news producer Muhammad Cohen told America’s story to the
world as a US diplomat and is author of
Hong Kong On Air ,
a novel set during the 1997 handover about television news, love, betrayal,
financial crisis, and cheap lingerie. Follow
Muhammad Cohen’s blog for more on the media and Asia, his adopted home.
(Copyright 2009 Asia Times Online Ltd. All rights reserved. Please contact us
for information on
sales, syndication and
republishing.)
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